What the CVS-Aetna Deal Means for the Delivery of U.S. Health Care

Executive Summary

The landscape for the delivery of health care in the United States is changing, but the traditional care-delivery players are not the change agents. Optum a division of UnitedHealth Group, the largest health insurer in America, has quietly amassed a group of medical providers over 20,000 strong. And the recent announcement of CVS’s $69 billion deal to acquire Aetna brings another insurer together with a large network of primary care providers: CVS has built more than 1,000 Minute Clinic locations inside its pharmacy stores in 33 states and the District of Columbia. The ramifications for traditional care providers typically dominated by hospitals is going to be big and may happen fast. We know traditional care in the United States is too expensive. The cost structures of hospitals are a big part of the problem. Therefore, we are seeing disruption in the hospital industry.

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The landscape for the delivery of health care in the United States is changing, but the traditional care-delivery players are not the change agents. The recent announcement of CVS’s $69 billion deal to acquire Aetna brings an insurer together with a large network of primary care providers: CVS has built more than 1,100 Minute Clinic locations inside its pharmacy stores in 33 states and the District of Columbia. Also, Optum a division of UnitedHealth Group, the largest health insurer in America, has quietly amassed a group of medical providers over 20,000 strong, and on December 6, UnitedHealth announced plans to acquire DaVita Medical Group for the $4.9 billion. DaVita operates nearly 300 medical clinics, 35 urgent-care centers, and six outpatient surgery centers in California, Colorado, Florida, Nevada, New Mexico, and Washington.

The ramifications of such deals for traditional care providers typically dominated by hospitals is going to be big and may happen fast. In fact, this environment is the most disruptive I’ve witnessed in my 35 years in the health care industry.

We know traditional care in the United States is too expensive. The cost structures of hospitals are a big part of the problem. Therefore, we are seeing disruption in the hospital industry. Several trends should be disturbing to hospital administrators, including the development of free standing, low-cost “neighborhood” hospitals. These facilities are strategically placed in fast-growing population centers, have just a few inpatient beds and emergency room bays, and no long-term care or reproductive services that bog down profits. What health care leaders should find even more concerning is the emergence of services designed to completely obsolete inpatient stays. Developed by the Johns Hopkins schools of medicine and public health, Hospital at Home has been tested in multiple markets throughout the United States and is working. Think about it: If our military can create a highly complex surgical theater anywhere in the world within hours, it’s not a stretch to think the knowledge and technology exists to take care of elderly, sick people in their own homes. In fact, when asked, most say that’s exactly what they want.

But back to the insurers. Why are they merging with doctor clinics? They have figured out the hospital business is beginning to be commoditized. Many functions of hospitals may become totally obsolete. New, nontraditional entrants are bringing fresh alternatives to the bureaucratic and autocratic management systems of traditional hospitals. Taking the care process to the patient — including all lab, x-ray, and diagnostic services — beats struggling to find a parking spot in a hospital lot or waiting on the phone for 20 minutes to schedule a visit. In other words, redesigned processes focused around the customer and supported by advancing technology result in much less need for many services traditionally delivered at the high-cost, low-service hospital.

To lower the cost of premiums, Aetna and CVS, UnitedHealth and Optum, and undoubtedly others are creating a marriage of the financing and delivery of care. Their intent appears to be to create the financial incentive to get upstream of the major cost driver in health care: hospitalization. By focusing physician and ancillary resources on preventing unnecessary hospital care, which drives 70% or more of medical cost, the total cost of care and therefore premium cost can be lowered. This cost and service improvement then differentiates the insurers, pharmacies, and other disruptive newcomers in the market.

In fact, this model has been around for 70 years in the likes of Kaiser Permanente. The KP model originated as a physician group practice and insurance company (now also includes hospitals) and has been traditionally one of the lowest-cost, highest-quality health care-insurance options in California. So, the market is heading back to the future.

Hospitals are in a challenging position. These aggressive new provider organizations are looking to improve value by delivering lower-cost, higher-quality service to large populations of patients. Large employers and the government are looking for the same thing. When reducing cost and improving service is the goal, reducing hospital services or moving those services to much lower cost settings becomes the target.

Traditional care providers can and must fight back. But it will require major change.

First, their leaders must understand where the world of incentives is going and jump to an incentive system that rewards value, not volume. This means moving aggressively away from fee-for service payment to global-risk-adjusted payments. (Salt Lake City-based Intermountain Healthcare is one system that understands this.) This will incent delivery systems to redirect resources from hospitals to outpatient and home settings. If the health system is responsible for the entire cost of managing the care of people over time, it will have a financial incentive to keep patients out of hospitals.

Next, delivery systems need to create a management system that allows for innovation and rapid experimentation. Multiple layers of bureaucracy will need to be dismantled and frontline workers empowered to identify and solve problems immediately instead of waiting for autocratic managers to make all decisions. Most care-delivery systems today don’t have processes for innovation and problem solving. Workers are not trained to identify and solve problems. So, they create workarounds, which result in defects and, in some cases, deaths.

These necessary changes won’t happen unless the leaders of care-delivery systems change themselves. Moving from command-and-control leadership behaviors to improvement leadership behaviors will be required. I’ve met many health care leaders who believe change is great as long as “I don’t have to.” They may be frogs in a boiling pot.

The CVS-Aetna marriage is only the tip of the iceberg. The number of startups in the health care delivery arena is staggering. This is evidenced by the number of venture funding deals, which grew some 200% between 2010 and 2014. It doesn’t take much imagination to realize many traditional care-delivery functions are going away, replaced by disruptors who have one focus: to obsolete traditional care delivery. As the buggy whip industry found out when the automobile came along, survival is not mandatory.

Editor’s note: This article has been updated to include UnitedHealth’s deal to acquire the DaVita Medical Group.

John S. Toussaint, MD, is the CEO of Catalysis, formerly the Thedacare Center for Healthcare Value. He is the former CEO of Thedacare, an integrated health system in Wisconsin, where he introduced the Toyota Production System principles in 2003.